Kansas City Southern (KSU) Q2 Earnings: What's In Store?

Leading railroad operator Kansas City Southern (NYSE:KSU) is slated to release its second-quarter results on Jul 19, before the market opens.

In the first quarter of 2016, the MO-based railroad operator reported better-than-expected earnings per share. However, last quarter’s bottom-line outperformance was largely the result of the conservative Zacks Consensus Estimate due to the significant slashing of earnings estimates due to multiple headwinds, the primary one being coal.

In the first quarter, the top line declined 7% year over year and also lagged the Zacks Consensus Estimate primarily due to softness in the energy segment with coal playing spoilsport. We expect the company’s top line to remain under pressure in the second quarter due to coal-related woes.

However, we note that despite the downward revisions, the Zacks Consensus this time ($1.04) is not as conservative as last quarter ($0.97). So, with the ills still in place, an earnings beat might be tough for the railroad operator in the second quarter.

Our quantitative model also doesn’t point to an earnings beat. Here’s why:

Kansas City Southern doesn’t have the right combination of the two key ingredients – positive Earnings ESP and a Zacks Rank #3 (Hold) or better – for increasing the odds of an earnings beat.

Zacks ESP: The Earnings ESP for Kansas City Southern is 0.00%. This is because the Most Accurate estimate of $1.04 is in line with the Zacks Consensus Estimate.

Zacks Rank: Kansas City Southern carries a Zacks Rank #3 but this alone isn’t enough to increase the chances of an earnings beat.

Looking at the fundamentals, here are the factors that should be at play:

Headwinds related to coal are expected to hurt Kansas City Southern’s second-quarter results, as has been the case in the past few quarters. At the Citi Industrials Conference last month, the company’s Chief Financial Officer, Michael Upchurch, stated that revenues as well as volumes were down as of Jun 12. With energy volumes declining 12%, volumes of Utility Coal, Frac Sand and Crude Oil fell 16%, 20% and 22%, respectively. Since coal is a key revenue-generating commodity for railroad operators, it is only natural that the decline in domestic coal shipments has hurt stocks in the space big time.

We believe adverse foreign currency movements characterized by the strength of the dollar, lower fuel surcharges received from customers due to declining fuel costs and slow carload growth from the energy sector will also hurt the railroad operator’s results. Moreover, commentaries on issues like the Oregon derailment and the likely impact of the launch of the expanded Panama Canal last month are expected during the second-quarter conference call.

Stocks That Warrant a Look

Here are a few transportation stocks that you may want to consider, as our model shows that these have the right combination for an earnings beat this time around:

United Parcel Service (NYSE:UPS) with an earnings ESP of +2.11% and a Zacks Rank #2 (Buy). The company will report second-quarter earnings on Jul 29.

Expeditors International of Washington (NASDAQ:EXPD) with an earnings ESP of +3.45% and a Zacks Rank #3. The company is slated to report second-quarter earnings on Aug 2.

Genesee & Wyoming (NYSE:GWR) with an earnings ESP of +1.28% and a Zacks Rank #3. The company is scheduled to report second-quarter earnings on Aug 1.